U.S. Presidents and Stock Market Performance: The Good, the Bad and the Useless

Abstract

We present an econometric framework that estimate conjoined ‘fixed effect’ components to analyze the presidential puzzle, by separating party policy impact on the stock market from each president ability. Our methodology enable us to examine what drives the higher excess return under Democratic presidencies, whether it is Democratic policy or Democratic presidents’ abilities or both. Our results indicate that both parties policies have overall negative impact on the stock market, while Democratic policy is slightly more negative; Democratic presidents have greater ability than Republican counterparts. Furthermore, president ability impacts the stock market more than party policy, and both parties have fewer impact on large deciles. We then classify president based on their abilities and find that presidents LBJ/Clinton, Nixon and Carter/Eisenhower are the “Good”, the “Bad” and the “Useless” presidents, respectively. We believe these findings add new insight to the current debate of what party has a better policy, and suggest a small government would be an optimal political economy system. Collectively, our results show that we ought to separate between president’s party affiliation (policy) and the president’s ability when we study how politics influences financial markets.

Keywords: political finance, simulated method of moments, conjoined fixed effect

JEL Classification: G02, G11